CAAD 450/2018-T: Deductibility of Costs Under Art. 23 CIRC – Unremunerated Loans to Subsidiaries in IRC

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Fernanda Maçãs (arbitrator-president), Jónatas Machado and Miguel Patrício (arbitrator-members), designated by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, agree as follows:

I. Report

1. A..., S.A., NIF..., with registered office at ... n.º..., Km ..., ...-... Alenquer (hereinafter A... or Claimant) submitted a request for establishment of a collective arbitral tribunal, under the terms of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter LRAT), in which the Tax and Customs Authority (hereinafter TA or Respondent) is the respondent, with a view to considering the illegality of the corporate income tax (IRC) settlement statement no. 2018..., as well as the respective settlement statements for interest no. 2018..., no. 2018..., no. 2018... and no. 2018..., and accounts adjustment no. 2018..., all associated with compensation no. 2018... .

2. The request for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Respondent.

2.1. The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to the provisions of article 6, paragraph 2, sub-paragraph a) and article 11, paragraph 1, sub-paragraph b) of the LRAT, the President of the Deontological Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

2.2. The parties were duly notified of such designation and did not manifest a desire to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11, paragraph 1, sub-paragraphs a) and b) of the LRAT, and articles 6 and 7 of the Deontological Code.

2.3. Thus, in accordance with the provision of article 11, paragraph 1, sub-paragraph c) of the LRAT, the Arbitral Tribunal was established on 20 November 2018.

1. To support this request, the Claimant submits, in summary, the following:

• Pursuant to the RIT (which was notified to the now Respondent through office no. ..., dated 24/4/2018), the TA made a correction to the taxable income of the Claimant's IRC for the tax period of 2014, in the amount of €185.344,78, relating to allegedly non-deductible financial charges.

• The tax acts subject to the present request for arbitral pronouncement were issued following the aforementioned tax inspection carried out on the Claimant.

• The illegality of the correction made in the context of the tax inspection affects the illegality of the tax acts issued as a consequence.

• The Claimant does not agree with the correction made by the TA regarding financial charges incurred with non-remunerated financings granted to subsidiary companies, as it considers that the granting of such loans falls within the ultimate objective of maintaining its financial interests.

• As can be inferred from the levels of participation held, the financial investments in the four subsidiary companies – to which non-remunerated loans were granted in the tax periods of 2013 and 2014, as appears in note 9 of the Annex to the Financial Statements as at 31/12/2014 and is presented in a table in point 31 of the p.i. – were all of a strategic nature, in which the Claimant assumed the role of a reference shareholder.

• Furthermore, the activities carried out by the companies in question were related to the activity of the Claimant itself, whose corporate purpose consists, among others, of studies, projects, marketing, installation and maintenance of electrical and electromechanical telecommunications equipment and construction of public and private works.

• For the Claimant, the complementarity in the value chain between the activity carried out by the Claimant and the activities carried out by the said companies was considered as a strategic option, a circumstance that motivated the acquisition of the said equity interests.

• Being a reference shareholder, the Claimant considered it appropriate to grant non-remunerated loans to its subsidiaries for various reasons, where the evaluation carried out, at the time, of the economic and financial situation of the subsidiaries stands out, which did not recommend direct negotiation of such loans between the subsidiaries and banks, as it would be more difficult to negotiate them, resulting in less favorable financing conditions.

• The need for structural support – which would help the subsidiaries overcome the difficulties felt at the time, with benefits arising therefrom for the reference shareholder that the Claimant represented – is easily explained by the fact that, in 2014, the total amount financed was reduced by more than 36% compared to 2013 (i.e., it went from approximately 3,970 thousand euros in 2013 to approximately 2,524 thousand euros in 2014).

• It was in this context that the Claimant made the non-remunerated loans, with the objective of contributing to the maintenance of the appreciation of its investment in those companies – thus contradicting the TA's thesis according to which there is no place for the fiscal deduction of the financial charges in question because it is understood that these are not directly related to the Claimant's activity (this was the reason why the TA considered that the requirement of indispensability of the financial charges incurred was not met, as established in art. 23 of the CIRC).

• Arbitral jurisprudence has been extensive and consistent with the deductibility of financial charges incurred by companies that, in turn, grant free loans to subsidiaries, considering that, in this context, there is an economic purpose to support such loans, a purpose that aims to obtain or guarantee future tax-related income.

• Existing, in the shareholder's sphere, an economic objective underlying the granting of non-remunerated loans to subsidiaries and such objective being to obtain or guarantee tax-related income, there should be no doubt regarding the framing of such granting within the profit-making activity of the shareholder, and thus the financial charges incurred upstream should be considered fiscally deductible in its sphere.

• In the present case, the granting of non-remunerated loans to subsidiaries had an underlying economic purpose, of appreciation of the investment made, materializable through future dividends and/or capital gains in scenarios of disposal of the subsidiaries.

• Therefore, the Claimant requests that the Arbitral Tribunal annul the correction relating to the non-deduction of financial charges in the amount of €185.344,78.

• On 8 June 2018, the Claimant paid the amount resulting from the accounts adjustment statement no. 2018... (see copy attached to the file as Document no. 3), associated with compensation no. 2018..., in the amount of €57.165,06 (see proof of payment attached to the present file as Document no. 7).

• In light of the above-mentioned facts and grounds, the Claimant understands that, in addition to being reimbursed for the tax improperly paid, it should be compensated for the corresponding indemnity interest to which it is entitled for the improper payment of such amounts, pursuant to article 43, paragraph 1 of the General Tax Law (LGT) and article 61 of the Tax Code and Procedure Code (CPPT).

3.1. In light of the above, the Claimant requests that: i) the present request for arbitral pronouncement be found proven and, consequently, the corporate income tax settlement statement no. 2018... be annulled, as well as the respective interest settlement statements no. 2018..., no. 2018..., no. 2018... and no. 2018..., and accounts adjustment no. 2018..., all associated with compensation no. 2018..., due to the absence of a factual or legal basis for the correction made to the Claimant's taxable income for the year 2014, in violation of the provisions of, among others, article 23 of the CIRC; ii) as a consequence of the annulment of the said tax settlement statements, interest settlement statements and accounts adjustments, a decision be rendered ordering the reimbursement of the amounts improperly paid by the Claimant as IRC in the year 2014, in the amount of €57.165,06, plus the reversal of the 2014 settlement, in the amount of €4,268.27, which was improperly retained by the TA, all in the total amount of €61.433,33; iii) a decision be rendered ordering payment of indemnity interest that is due pursuant to article 43 of the LGT and article 61 of the CPPT.

1. In the Reply, the Respondent answered, by way of exception and objection, arguing that the present request should be judged inadmissible:

• In the defense by exception, the Respondent states that the request is manifestly time-barred, given that the additional IRC settlement no. 2018... was sent to the Claimant's electronic mailbox on 14/5/2018, and that on 19/5/2018 the now Claimant considered itself notified of that tax act.

• Pursuant to the provisions of article 10, paragraph 1, sub-paragraph a) of the LRAT, the request for arbitral pronouncement must be submitted, in this case, within a period of 90 days from notification of the tax act of additional IRC settlement no. 2018... . Having commenced the period to file the request for arbitral pronouncement on 20/5/2018, such 90-day period expired on 17/8/2018.

• However, by virtue of the provisions of article 279 of the Civil Code, if the period expires during judicial recess, it is transferred to the first business day, that is, 3/9/2018. Thus, having the request for arbitral pronouncement been submitted on 11/9/2018, the right of action has lapsed, as at the time of its submission the period provided by law had already expired with respect to notification of the 2014 IRC settlement.

• The Claimant counted the 90-day period from notification of the accounts adjustment statement, the deadline for voluntary payment of which expired, in its view, on 11/6/2018 – however, the understanding advocated by the Claimant is manifestly unfounded because only the additional IRC settlement constitutes an act capable of generating an obligation to pay the tax.

• Based on the above and considering that the request for arbitral pronouncement is clearly time-barred, the Respondent raises a peremptory exception of time-bar to which article 576, paragraph 3 of the Civil Procedure Code (CPC) refers, ex vi article 29, paragraph 1, sub-paragraph e) of the LRAT, and consequently, the Respondent should be absolved of the request, with the appropriate legal consequences.

• In the defense by objection, the Respondent states that the arbitral decisions cited by the Claimant do not pre-conform the present process entirely, given the non-existence of the legal figure of precedent.

• Moreover, there is jurisprudence on the matter from the Central Administrative Court South and the Supreme Administrative Court that point to a legal solution different from that revealed arbitrally, with the correction sub judice being in consonance with that.

• As can be seen from the reading of the inspection procedure, the Claimant resorted to financing through third-party capital, namely bank financing, which is recorded in the various sub-accounts of SNC account 25 (Financing Obtained). In addition to the loans, the now Claimant also incurred financial charges in 2013 and 2014, as referred to in the table below:

[table appears in original]

• The Claimant incurred, in 2013, financial charges, namely interest resulting from the loans it contracted, having granted loans to associate companies and other entities, without being remunerated for the value of the loans granted to the associate companies. Indeed, the Claimant incurs financial charges, namely interest resulting from loans contracted, and simultaneously grants non-remunerated loans to associate companies, whereby, in accordance with the provisions of article 23 of the CIRC, such charges are not fiscally accepted.

• In light of article 23 of the CIRC, expenses, to be fiscally deductible, must be limited to either obtaining the gains subject to tax or maintaining the source of production. In this case, the Claimant contracted loans incurring charges with them and, simultaneously, "grants" non-remunerated financing to related companies and, in that endeavor, the said charges are not directly related to its activity, whose corporate purpose consists of the manufacture of radio and communication equipment, studies, projects, marketing, installation and maintenance of telecommunications, electrical and electronic equipment and construction of public and private works.

• Therefore, as they are not related to the activity of the taxpayer, the requirement of indispensability of all recorded charges is not met, as established in article 23 of the CIRC.

• The Respondent further states that the financial charges incurred by the Claimant constitute costs incurred in obtaining funds intended for financing, on a free basis, related entities and, in that endeavor, the charges in question are not directly related to the Claimant's activity, but rather to the activity and interest of the related companies to whom free financing was granted.

• As the costs in question do not fall within the Claimant's activity, which were incurred not for the pursuit of its interests, but for the interests of others, they cannot be framed within the scope of its corporate purpose and, in that endeavor, such financial costs are not directly related to any activity inscribed in its corporate purpose, nor do they relate, even indirectly, to its activity.

• The expenses listed in article 23 of the CIRC must respect the company in question itself, because for an amount to be considered an expense of that company, it is necessary that the respective activity be carried out by it itself, not by other companies even if it maintains relations with it.

• One cannot confuse the benefit and interest of the company receiving the money, for which it does not pay interest, with those of the investing company that cuts part of its resources to make these loans.

• In the case at hand, it is unquestionable, in the Respondent's view, that the charges in question were incurred to make free loans to related companies and, in that endeavor, such charges did not contribute to the generation of revenues or gains subject to tax or to the maintenance of the source of production of the entity that incurred them, namely the now Claimant.

• In the event that the arguments presented by the Respondent entity are not acceptable and if the interpretation established by the Claimant is advocated, it is noted from now on that the same is contrary to the principles that govern the Tax Constitution.

• A company that incurs charges for the purpose of financing its own commercial activity does so viewing solely its own corporate interest, whereas a company that finances itself and incurs the inherent financial charges to finance related companies does so viewing objectively the corporate interest of its associate and, consequently and reflexively, the interest of the creditors. Given the above, it is understood that the interpretation outlined by the Claimant is in violation of the principle of tax equality.

• It is further understood that the interpretation presented by the Claimant is also offensive to the principle of taxpaying capacity. The Respondent further concludes that a legal solution contrary to that underlying the correction under review would necessarily lead to violation of the principle of taxation on real income.

• Based on the above, the Respondent concludes that the interpretation promoted by the Claimant of the fiscal deductibility of financial charges incurred, in light of the provisions of article 23 of the CIRC, presents itself as frontally violating the principles of equality, taxation on real profit and taxpaying capacity.

4.1. In light of the above, the Respondent concludes that: i) the peremptory exception of time-bar of the request for arbitral pronouncement should be found proven and, pursuant to article 576, paragraph 3 of the CPC, ex vi article 29, paragraph 1, sub-paragraph e) of the LRAT, the Respondent should consequently be absolved of the request; ii) subsidiarily, the present request for arbitral pronouncement should be judged as unproven and, thus, the Respondent absolved of all requests, all with the appropriate and legal consequences.

1. The now Claimant exercised the right to contradiction regarding the matter of exception invoked by the Respondent, arguing, in summary, its inadmissibility.

2. By arbitral order of 25 January 2019, the date of 15 February 2019 was designated, pursuant to article 18 of the LRAT, for the purpose of holding the judgment hearing.

3. On the said date of 15 February, at CAAD, a party statement took place, pursuant to the provisions of article 466 of the CPC, as well as the examination of the witness brought by the Claimant, where the depositions of N..., executive manager of A... since 25 July 2017 and until that date controller of international investments, and B..., certified accountant who made the accounting records of the loans contracted by A... to fund its subsidiaries, were respectively obtained.

4. On that same date, and as the parties did not opt for oral arguments, the Tribunal notified the now Claimant and the Respondent to, in that order and in succession, submit written arguments within a 15-day period. In compliance with the provisions of article 18, paragraph 2 of the LRAT, the Tribunal designated 20/5/2019 for the pronouncement of the arbitral decision.

5. The parties submitted their written arguments within the determined period, having in the same reaffirmed all the arguments that, summarily, have already been set out above.

II. Case Management

1. The arbitral tribunal was regularly established and is materially competent, as provided in articles 2, paragraph 1, sub-paragraph a) and 4, both of the LRAT.

2. The parties have legal standing and capacity, are legitimate and are represented (see articles 4 and 10, paragraph 2 of the same law, and articles 1 to 3 of Order no. 112-A/2011 of 22 March).

3. Notified for that purpose, the Claimant replied, through a request dated 14 January 2019, to the peremptory exception of time-bar raised by the TA.

4. The Respondent raised, in its reply (and also in the written arguments submitted on 18 March), a peremptory exception of time-bar, as it understands that, pursuant to the provisions of article 10, paragraph 1, sub-paragraph a) of the LRAT, the request for arbitral pronouncement should be submitted, in this case, within a period of 90 days from notification of the tax act of additional IRC settlement no. 2018... . Having commenced the period to file the request for arbitral pronouncement on 20/5/2018, such 90-day period expired, with application of the provisions of article 279 of the Civil Code, on the first business day following the judicial recess, that is, 3/9/2018.

5. For the Respondent, having the request for arbitral pronouncement been submitted on 11/9/2018, the right of action has lapsed, as at the time of its submission the period provided by law had already expired with respect to notification of the 2014 IRC settlement.

6. The Respondent further alleges that the Claimant counted the 90-day period from notification of the accounts adjustment statement, the deadline for voluntary payment of which expired, in its view, on 11/6/2018 [recte: 13/6/2018, see Document 3 attached to the p.i.] – however, such understanding advocated by the Claimant is considered by the Respondent as manifestly unfounded because, in the latter's view, only the additional IRC settlement constitutes an act capable of generating an obligation to pay the tax.

7. In these terms, and because it considers the present request for arbitral pronouncement clearly time-barred, the Respondent raises a peremptory exception of time-bar to which article 576, paragraph 3 of the CPC refers, ex vi article 29, paragraph 1, sub-paragraph e) of the LRAT, and consequently, the Respondent should be absolved of the request.

8. Notified to reply to the said exception, the now Claimant came to state, in summary, that it considers the peremptory exception of time-bar to not obtain, as it disagrees with the position taken by the Respondent regarding the calculation of the period for submission of the request for arbitral pronouncement.

9. In its view, it is clear from the provisions of articles 10, paragraph 1, sub-paragraph a) of the LRAT, and 102, paragraph 1, sub-paragraph a) of the CPPT, that the period for submission of the request for arbitral pronouncement is calculated from the expiration of the period for voluntary payment of the tax obligations legally notified to the taxpayer.

10. The Claimant recognizes that the additional IRC settlement and the compensatory interest settlement are the tax acts capable of generating obligations to pay tax obligations – however, it considers that this does not mean that the period for submission of the request for arbitral pronouncement should be calculated from notification of such acts, given that the IRC settlement statement, while indicating the means by which the Claimant could contest or appeal, expressly states that the contest or appeal must be made "within the periods established in articles 137 of the CIRC and 70 and 102 of the CPPT" (see Doc. 1 attached with the request).

11. It considers, thus, the now Claimant that, as mentioned, and pursuant to sub-paragraph a) of paragraph 1 of article 102 of the CPPT, the period for appeal is calculated from "[t]he expiration of the period for voluntary payment of the tax obligations legally notified to the taxpayer" and not from notification of the respective settlement acts.

12. Based on the above, the Claimant concludes that the Respondent's argument regarding the method of calculation of the period for submission of the request for arbitral pronouncement should not be accepted, whereby, in its view, the peremptory exception invoked should also be judged as inadmissible.

13. It is necessary to analyze and decide.

14. In this regard, it should be noted first and foremost what article 10, paragraph 1, sub-paragraph a) of the LRAT provides, according to which the "request for establishment of an arbitral tribunal is submitted within a period of 90 days, counted from the facts provided for in paragraphs 1 and 2 of article 102 of the Tax Code and Procedure Code, regarding acts capable of independent appeal".

15. In light of what the cited article provides, there is no doubt that the request for establishment of an arbitral tribunal must concern acts capable of independent appeal (as, in this case, the additional IRC settlement and the compensatory interest settlement).

16. However, even though the calculation of the 90-day period in the present case was made from the payment date shown on the accounts adjustment statement, such an act should not be considered unrelated to the IRC settlement at issue. In that sense, it states, unequivocally, the Judgment of the Central Administrative Court South rendered on 11/10/2018 (proc. 1060/16.8BESNT): "The issuance of the accounts adjustment statement with tax payable is not to be disregarded, given that it embodies the requirement to pay tax that leads to the application of the calculation of the period pursuant to the terms stated in art. 102, paragraph 1, sub-paragraph a) of the C.P.P.T. – expiration of the period for voluntary payment of tax obligations legally notified to the taxpayer – as defining the "dies a quo", as it is interconnected with the settlement in question. It is important to emphasize that the adjustment statement is not an act separate from the settlement, but rather the result of the financial flows associated with it and which, in the particular case, resulted in the determination of an amount of tax payable. The Tax Authority's option to create separate documents, although not prohibited, does not result from any legal or regulatory requirement, whereby we are not dealing with acts of a different nature. Such artificial separation finds no legal or regulatory support or justification. Moreover, the document of the additional IRC settlement statement must be viewed in an integrated manner and together with the accounts adjustment statement, thus resulting in tax payable by the taxpayer, as a consequence of which the initial term of the period provided for in art. 70, paragraph 1 of the C.P.P.T., is calculated from the final payment date of the tax, as the Court "a quo" decided."

17. In the same sense, see also the Judgment of the Central Administrative Court North rendered on 15/11/2013 (proc. 0644/06.7BEPRT): "Having been attached to the file a document ["Accounts Adjustment Statement"] issued by the Tax Administration and notified to the Applicant, from which there are, in particular, references to the type of tax and periods in question, as well as the indication of a certain "Payment Deadline", the Court a quo cannot, without more, conclude for the time-barring of the appeal without taking into account the factual situation underlying it, given its relevance for the purpose pursuant to the provisions of art. 102, paragraph 1, sub-paragraph a) of the CPPT (period for submission of judicial appeal)." [The Court North did not decide the question of the (non-)lapsing of the right to file an appeal because the document was partially illegible.]

18. It remains to note what the said article 102 of the CPPT provides, ex vi articles 10, paragraph 1, sub-paragraph a) and 29, paragraph 1, sub-paragraph a), both of the LRAT.

19. As Carla Castelo Trindade correctly notes, in this regard (in Legal Regime of Tax Arbitration, 2016, pp. 244-245 and 247), "paragraph 1 of article 102 of the CPPT provides that judicial appeal – and, in this case, the request for establishment of the arbitral tribunal – may be submitted within a period of 90 days from: [sub-paragraph] a) the expiration of the period for voluntary payment of the tax obligations legally notified to the taxpayer [...]. From this reference by the LRAT to the facts listed in paragraph 1 of article 102 of the CPPT, it follows immediately that the taxpayer may submit the request for arbitral pronouncement within the 90 days following the expiration of the period for voluntary payment of the tax obligations that are validly notified to it, as provided for in article 102, paragraph 1, sub-paragraph a) of the CPPT. The expiration of the voluntary payment period is that which is fixed in the tax settlement or, subsidiarily, the 30-day period established in article 85, paragraph 1 of the CPPT. [...] [only] if from the tax settlement there is no obligation to pay any amount, [is it that] the 90 days to request the establishment of the arbitral tribunal [are] calculated [...] pursuant to [article] 10, paragraph 1, sub-paragraph a), combined, in this case, with article 102, paragraph 1, sub-paragraph b) of the CPPT [...], that is, [are] initiated with notification of the settlement." (italics ours).

20. In light of the above, it is concluded that: i) the present request for establishment of an arbitral tribunal concerns an act capable of independent appeal, whereby the provisions of article 102, paragraph 1, sub-paragraph a) of the CPPT apply to it, ex vi articles 10, paragraph 1, sub-paragraph a) and article 29, paragraph 1, sub-paragraph a) both of the LRAT; ii) the period for submitting a request for establishment of an arbitral tribunal must be calculated from the expiration of the payment deadline date shown on the accounts adjustment statement (i.e., from 13/6/2018), and as this period is one of 90 continuous days (pursuant to the provisions of articles 279 of the Civil Code and 20, paragraph 1 of the CPPT, ex vi article 29, paragraph 1, sub-paragraph a) of the LRAT), the expiration of the said period does not occur on 3/9/2018 (as the Respondent argues) but rather on 11/9/2018.

21. Having the Claimant submitted its request for arbitral pronouncement on 11 September 2018, it is concluded that the same is timely – whereby, consequently, the peremptory exception invoked by the Respondent in its reply is considered inadmissible.

22. The process is not affected by nullities and there is, in light of the above, no obstacle to the consideration of the merits of the case.

III. On the Merits

III.1. Proved Facts

1. The following facts are considered proved:

A. The Claimant is a limited company that has as its object the manufacture of radio and communication equipment and apparatus (radio transmitters, telegraphy and telephony), studies, projects, marketing, installation and maintenance of telecommunications, electrical and electromechanical equipment and construction of public and private works, having its activity evolved to include the management, development, construction, installation and maintenance of infrastructure and equipment for telecommunications networks (mobile and fixed) and energy networks (conventional and renewable) – see copy of the permanent certificate with access code ..., which appears as Doc. 4 attached to the file.

B. The Claimant is an IRC taxpayer, with headquarters and actual management in Portugal, pursuant to article 2, paragraph 1, sub-paragraph a) of the CIRC, being subject to the general regime of IRC taxation.

C. As confirmed by the current Executive Manager of the Claimant, in party statement, A... engages in the construction of infrastructure for energy distribution and telecommunications networks, with financing or financial asset management activities being outside its corporate purpose. It further added that it has important international clients (for example, C..., D..., E...) and activity in many countries, already having a footprint in more than 50 countries.

D. The said clients challenge the now Claimant to participate in the development of a wide variety of equipment development and network projects in different countries, proposals that it could hardly refuse due to the economic weight of the clients that formulate them within the framework of its client portfolio. To address these proposals and be able to develop its activities, the Claimant opted, in some cases, for the establishment of subsidiary companies, under Portuguese or foreign law, in partnership with other partners, assuming in them a position of reference shareholder.

E. In the context of the service order no. OI2017..., the Claimant was subject to external general-scope tax inspection regarding the 2013 tax period, and partial-scope inspection, in respect of IRC and VAT, for the 2014 tax period.

F. In that context, the Claimant was notified to, if it so wished, exercise its right to be heard on the corrections proposed by the TA – the Claimant having exercised that right within the legal periods (see proof of exercise of the right to be heard, which appears as Doc. 5 attached to the file).

G. On 26/4/2018, the Claimant was notified (through office no. ..., dated 24/4/2018) of the RIT – which maintained, without any change, the corrections provided for in the draft inspection report (see copy of the said RIT attached to the file).

H. Pursuant to the said RIT, the TA made a correction to the taxable income of the Claimant's IRC for the 2014 period in the amount of €185.344,78, relating to allegedly non-deductible financial charges.

I. The TA considered that "the taxpayer, in [...] 2014, while incurring financial charges, namely interest, resulting from loans it contracted, granted loans to associate companies and other entities, without being remunerated for the value of the loans granted to the associate companies" (see RIT attached to the present file), whereby it considered that such financial charges incurred by the Claimant are not subject to full deduction from taxable profit pursuant to article 23 of the CIRC.

J. The classification of the subsidiary companies in the periods subject to tax inspection, to which non-remunerated loans were granted in the tax periods of 2013 and 2014, as appears in note 9 of the Annex to the Financial Statements as at 31/12/2014, is what can be seen in the following table reproduced in point 31 of the p.i.:

[table]

L. Given the levels of participation held, the financial investments in the four companies in question were all of a strategic nature, in which the now Claimant assumed the role of a reference shareholder.

M. Any of the activities pursued by the four companies in question (namely: projects in alternative energy and telecommunications) are related to the corporate purpose of the now Claimant, enabling it complementarity in the value chain between its activity and that of the said companies – reason for which the Claimant decided to acquire the said equity interests.

N. Given the mentioned complementarity and its relevance to the Claimant's activity, it considered it appropriate to grant non-remunerated loans to its subsidiaries, having, for that purpose and at the time, investigated, in concreto, the economic and financial situation of each of the subsidiaries. From that investigation it was concluded that direct negotiation of such loans between the subsidiaries and banks would be more difficult and would impose higher charges.

O. As stated by the current Executive Manager of the Claimant, in party statement, the less favorable conditions in financing from banks or even the inability to access such financing in a timely manner hampered the performance of the subsidiaries and, for that reason, could jeopardize the Claimant's activity. On the other hand, it is noted that the support provided by the Claimant to the subsidiaries contributed to the difficulties felt at that time being overcome, with benefits for the reference shareholder that the Claimant represented.

P. Indeed, it was, in large measure, exogenous circumstances to A..., such as the aforementioned difficulty in obtaining credit in a timely manner and the urgency in developing the projects, that led it to resort to the financing solution found.

Q. As confirmed by the current Executive Manager of the now Claimant, in party statement, sometimes A... has work proposals from important clients to work in different countries that it could hardly refuse. The projects extend over time and sometimes require the establishment of locally incorporated companies. For the operationalization of the projects, in terms of speed and lack of credit history (track-record) of the companies, it is difficult to resort to local financing, being necessary to mobilize financial resources, through non-remunerated advances, for the local companies.

R. As also stated by the current Executive Manager of the Claimant, in party statement, in some cases, with a view to minimizing risk, A... creates specific companies to associate with local partners in carrying out certain projects abroad. The projects involve a prior assessment of risks, the material resources needed and local financing conditions – a task to which the deponent dedicated himself – that preceded the decision to proceed or not to proceed, taking into account the profit-making purpose of the group. The interests in these companies are within the consolidation scope of the A... group, integrating its development strategy.

S. In that sense, it was explained in detail by the current Executive Manager of the now Claimant, in party statement, that:

i) F..., a Portuguese law company, changed from SGPS to SA, holding the investment of A... in Brazil (the deponent stated that at the time he expressed his preference for the establishment of a Brazilian law company that could count on the participation of all participants in the investment project). It was only holder of interests, whereby the borrowing difficulties also affected it, in that the loans all went through Brazil.

ii) G... was dedicated to investment in the field of renewable energies, with partners H... and I... (in some cases with common shareholders to A...) and an American company to build a solar panel factory in Portugal. G... was able to obtain financing by being able to count on the guarantee of companies participating in its capital. However, to some extent because of the crisis, it decided to suspend its activity, still today paying the loans then contracted. A... provides the company, in the "dormant" situation, with the means to continue meeting its credits, in that it does not carry out any economic activity.

iii) J... is a Namibian law company that holds a stake in K... . It aimed to develop, at the invitation of L... (which held interests in utilities in both African countries), fiber construction projects in collaboration with local partners.

iv) M..., a Spanish law vehicle company, with partners H..., was holder of a solar panel park in Spain, between Mérida and Badajoz. It was sold in 2015 giving a capital gain of approximately €95.000,00. (This capital gain was also confirmed by witness B..., certified accountant of the now Claimant and responsible for the accounting records of the loans contracted by A... for advances – e.g., loans, secured accounts – to its subsidiaries.)

T. All the above-mentioned companies fall within the scope of A...'s activity. It contracted loans to finance group companies, because, in general, either there were no financing conditions for each of the group's companies or those conditions were adverse. From 2013 to 2014 there was a reduction in the order of €1.500.000,00, which is explained by a more learned, mature and careful risk analysis, in light of previous experiences not always successful.

U. Indeed, the Claimant's support to its subsidiaries had a conjunctural nature – as can be attested by the fact that, in 2014, the total amount financed was reduced by more than 36% compared to 2013 (from about 3,970 thousand euros in 2013 to about 2,524 thousand euros in 2014) – but which was decisive having in view the expectation of obtaining, or the guarantee of obtaining, income subject to IRC in the future.

V. The financing decisions made by the now Claimant regarding its subsidiaries had the sole objective of pursuing the interest of the shareholder in ensuring the profitability of its investments in the subsidiary companies.

X. All charges incurred by the Claimant with the financing in question were assumed solely in the interest of the shareholder and in the context of the normal exercise of the activity of managing assets arising from interests that are, in fact or potentially, income-producing for the Claimant.

Z. It is noted that the total number of loans made was relatively circumscribed, having as recipients a limited number of group companies, the already mentioned companies F..., G..., J... and M... . There is no verification, for example, of the granting of loans to companies outside the group and its business activity. Nor is there verification of the systematic exercise of activity of granting loans with profit-making purpose. It is, therefore, as already mentioned above, a matter of ensuring, exceptionally and promptly, the availability of the financial resources that the companies need punctually for the effective development of their activity.

AA. Also, the period during which the loans were granted is limited, concerning only the time reasonably adequate and necessary for the development of specific projects carried out mainly abroad. These frequently extended over time and recommended or required, in some cases, the establishment of locally incorporated companies and the guarantee of their prompt and sufficient financing, having in view the guarantee of their full execution within an adequate period. This occurred only while the investment projects were running and to the extent strictly necessary for their execution.

AB. As stated by the current Executive Manager of the Claimant, in party statement, the granting, by the Claimant, of non-remunerated loans to subsidiaries had the purpose of appreciation of the investment previously made by it and – regardless of the risks involved – could (and could) allow it appreciation through future dividends and/or through capital gains in case of disposal of the subsidiaries.

AC. Such purpose of appreciation was demonstrated by the example, already cited above, given both by witness B..., certified accountant of the Claimant, and by the current Executive Manager of the Claimant (in party statement): the interests held in M..., which were sold in 2015, generated a capital gain in the Claimant's sphere of approximately €95.000,00. (The said witness further confirmed that there was no distribution of dividends.)

AD. In compliance with the period of article 102, paragraph 1, sub-paragraph a) of the CPPT, the Claimant filed its request for establishment of an arbitral tribunal on 11/9/2018.

III.2. Unproved Facts

1. There are no facts relevant to the consideration of the case that have not been proved.

III.3. Reasoning for the Determination of Factual Matters

1. The Tribunal does not have to pronounce itself on all details of the factual matters that were alleged by the parties, being incumbent upon it the duty to select the facts that interest the decision and to discriminate the matter it considers proved and to declare those it considers unproved (see article 123, paragraph 2 of the CPPT and article 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, sub-paragraphs a) and e) of the LRAT).

2. In this way, the facts relevant for the judgment of the case are selected and shaped according to their legal relevance, which is established with regard to the various solutions for the object of the dispute in applicable law (see art. 596, paragraph 1 of the CPC, applicable ex vi article 29, paragraph 1, sub-paragraph e) of the LRAT).

3. Thus, having in view the positions assumed by the parties, in light of the provisions of article 110, paragraph 7 of the CPPT, the documentary and testimonial evidence presented, as well as the party statement that was given, the facts listed above are considered proved, with relevance for the decision.

III.4. Matter of Law

1. The question to be decided concerns the admissibility, for purposes of article 23 of the CIRC, of the deduction of interest paid by A... in the context of resorting to credit with financial institutions and then granting non-remunerated loans to a set of subsidiary companies.

2. Pursuant to article 23, paragraph 1 of the CIRC, under the heading expenses and losses, in the wording in force in 2014, it was established that "[f]or the determination of taxable profit, all expenses and losses incurred or supported by the taxpayer to obtain or guarantee income subject to IRC are deductible." For its part, paragraph 2, sub-paragraph c) of the same article considered to be covered by that paragraph 1 expenses and losses of a financial nature relating to interest on third-party capital applied in business. What is at issue, therefore, is whether, in the specific case, the interest paid by A... for credit contracted with financial institutions to dispense non-remunerated loans to subsidiary companies can be considered expenses of a financial nature relating to interest on third-party capital applied in business.

3. It is important to emphasize the importance of the framing of the problem, having in view that loans between companies in the same group, due to their long, equivocal and fiscally questionable history throughout, should give rise to rigorous scrutiny by the TA and the courts. It is a particularly delicate area, from a legal point of view, in which the need to ensure tax legality and prevent erosion of the tax base require, again, careful examination so as to prevent the abusive use of legal forms for tax avoidance purposes.

4. Particularly sensitive is the use of loans with interest below market value (below-market interest loans) between related entities (e.g.: members of the same family; companies of the same group; companies, partners and managers), and some structures can constitute a form of tax avoidance, reducing the taxpaying capacity of taxpayers and increasing the risk of tax base erosion, namely through the elimination or substantial reduction of interest receivable from the debtor and the increase of deductions of interest paid to the creditor.

5. There are no shortage of examples, in specialized literature, of recharacterization of loans granted with interest below market value as capital contributions or increases, dividend payments or indemnity payments[1]. However, in this type of situations, the facts of each particular case and the economic substance of the transactions at hand are often decisive. Parallel to the analysis of article 23, paragraph 1 of the CIRS, in the segment pertinent to the resolution of the particular case, it will be exactly those two essential aspects – facts and their economic substance – that will be the focus of our analysis, making use of objective and universalizable criteria that allow the TA and the courts to examine and scrutinize this type of situations in comparable cases.

6. In the TA's view, the Claimant incurred financial charges, namely interest, resulting from loans it contracted and granted loans to associate companies and other entities, without being remunerated for the value of the loans granted to associate companies. For that reason, such interest should not be deductible in full from the taxable profit of A... for purposes of article 23 of the CIRC. The TA maintains, as can be read in the RIT, that the totality of the charges is not directly related to the activity of the taxpayer, whose corporate purpose consists of the manufacture of radio equipment and communication, studies, projects, marketing, installation and maintenance of telecommunications, electrical, electronic equipment and construction of public and private works.

7. In the abstract, the TA's position has undisputed merit, in that, as these are formally distinct legal entities, it would be expected that each of them had the capacity to obtain the financing means it needs. As a general rule, it should be held that, pursuant to article 23, paragraph 1 of the CIRC, only costs that respect the activity developed by the taxpayer itself in accordance with its corporate purpose are deductible.

8. In this sense has pronounced itself, and rightly so, the jurisprudence of the Supreme Administrative Court[2], when it says, referring to the said provision, that "the costs foreseen there cannot fail to respect, first and foremost, the contributing company itself. That is, for a certain amount to be considered a cost of that company, it is necessary that the respective activity be carried out by it itself, not by other companies."

9. This is, in fact, the default rule. In general, the principle applies that each company in a business group is a separate and independent legal entity with duties imposed by the legislation applicable to commercial companies. Any departure from this principle should be exceptional and duly justified from an economic point of view. This rule will only not apply if a holistic analysis supported by the principles of the primacy of substance over form and the consideration of the economic substance of transactions – essential to the interpretation and application of tax norms – justify the configuration, in the particular case, of a solution of a different meaning.

10. The response to the question requires that one begin by paying attention to the literal wording of article 23, paragraph 1, sub-paragraph c) of the CIRC, in the wording in force in 2014. There is talk of the deductibility of charges incurred or supported by the taxpayer to obtain or guarantee income subject to IRC. This wording is clearly different from the wording of the same provision in force until the end of December 2013, which read: "Expenses and losses that are proved to be indispensable for the realization of income subject to tax or for the maintenance of the source of production are considered as expenses."

11. This latter formulation was more restrictive, introducing the idea that in addition to being charges necessary for the realization of income subject to tax or for the maintenance of the source of production, the same would only be deductible if they were truly indispensable[3]. In the wording in force in 2014, the requirement of indispensability is eliminated, and it becomes sufficient, to support deductibility, that these are charges incurred or supported by the taxpayer to obtain or guarantee income subject to IRC.

12. Even so, even this formulation, although eliminating the requirement of indispensability of the charge, certainly does not admit the deduction of any and every expense, even if undertaken in the interest of the company (e.g., payment of the wedding of the daughter of the company's best client manager). The teleological and systematic element of interpretation requires that deductibility be limited to expenses necessary and ordinary, economically related to the operation. That is, the same may be deductible even if they are not indispensable for the realization of income or for the maintenance of the source of production, but must always have a relationship of economic suitability, necessity and proportionality in the strict sense with the obtaining and guarantee of income.

13. It is a matter of affirming the deductibility of expenses that are considered ordinary, necessary and reasonable for the production of income – even if not indispensable – to invoke Anglo-Saxon terminology[4]. Even if indispensability of the charge is not required for its deductibility, one will always have to require its necessity and normal material connection with the company's activity.

14. This means that a given charge may be subjectively considered, and even prove to be, appropriate and useful for the production of business profits, but still not be fiscally deductible because it does not establish objectively a normal connection with the company's activity. Conversely, expenses that result from normal management acts which, based on the information known at the time of their execution, could be aimed at the expected obtaining of income or the maintenance of the source of production (physical, intangible, financial or other), may be deductible, even if they subsequently prove to be unproductive.

15. The question of whether the charges in question are deductible pursuant to article 23, paragraph 1, sub-paragraph c) of the CIRC – if these are truly charges incurred or supported by the taxpayer to obtain or guarantee income subject to IRC – requires the analysis of the charges at hand from the point of view of their necessity and normality, having as a point of reference the statutory corporate purpose of the taxpayer. It is also important to investigate what the economic and fiscal meaning of the loans contracted by A... and granted by it to group companies is. In the subsequent analysis, we will examine the loans based on the following criteria:

• Suitability to the corporate purpose
• Quantity
• Quality
• Duration
• Destination
• Purpose
• Necessity
• Economic meaning

1. It is necessary to take into proper account the fact that A... conducts its activity in many countries, already having its footprint established in more than 50 countries. This company has important international clients (e.g., C..., D..., E...), from which it frequently receives work proposals challenging it to participate in the development of a wide variety of equipment development and network projects in different countries, proposals that it could hardly refuse due to the economic weight of the clients that formulate them within the framework of its client portfolio. To address these proposals and be able to develop its activities, A... opted, in some cases, for the establishment of subsidiary companies, under Portuguese or foreign law, in partnership with other partners, assuming in them the position of reference shareholder.

2. This latter aspect warrants an additional note in light of the right to freedom of private economic initiative (art. 61, paragraph 1 of the Constitution of the Portuguese Republic) and even the freedom of establishment enshrined in European Union law (art. 49 of the Treaty on the Functioning of the European Union). Together, these rights include the possibility of a commercial company to opt, within the framework of the economic strategy it has outlined, for the acquisition of equity interests or creation of subsidiary companies, branches, agencies or offices, both in the State where it has its seat and in another where it intends to develop its activity. The law places a wide variety of legal forms at the disposal of economic agents, so as to enable them to effectively pursue their objectives. This, without prejudice to the differences and specificities in the tax treatment that may result therefrom.

3. The elements brought to the case allow for the conclusion that A... did not at some point dedicate itself to the financial activity of lending money, and it cannot therefore be said that the provision of financing means to some subsidiary companies extravasates, by itself, its statutorily defined corporate purpose. The factual data available (e.g., quantity, quality, duration, destination, purpose and necessity of the loans) do not allow it to be said that in the particular case there was a deviation from the corporate purpose, namely that A... was improperly conducting itself as an SGPS.

4. On the one hand, the total number of loans made is relatively circumscribed, having as recipients a limited number of group companies, namely the companies F..., G..., J... and M... . There is no verification, for example, of the granting of loans to companies outside the group and its business activity. Nor is there verification of the systematic exercise of activity of granting loans with profit-making purpose. It is, above all, to ensure, exceptionally and promptly, the availability of the financial resources that the companies need punctually for the effective development of their activity. The loans, clearly conjunctural, serve an undeniable economic purpose.

5. On the other hand, the period during which the loans were granted is also limited, concerning only the time reasonably adequate and necessary for the development of specific projects carried out mainly abroad. These frequently extended over time and recommended or required, in some cases, the establishment of locally incorporated companies and the guarantee of their prompt and sufficient financing, having in view the guarantee of their full execution within an adequate period. This occurred only while the investment projects were running and to the extent strictly necessary for their execution. Indeed, from 2013 to 2014 there was a reduction in the loans granted in the amount of 36%.

6. The projects carried out by A... through the subsidiary companies were part of the company's economic development strategy and its relationship with its clients abroad. These projects involved a prior assessment of risks, the material resources needed and local financing conditions, an assessment that preceded the decision to proceed or not, and under what form, having in view the profit-making purpose of the group. In this framework, the decisions of investment and of contracting and granting, punctually and exceptionally, loans to the group companies associated with the development of specific projects were part of a series of reasonable and diligent decisions.

7. The loans were granted with a view to viabilizing A...'s main activity, albeit through subsidiaries, namely in the area of telecommunications and energy networks installation. In no place is the pursuit of extra-corporate interests, in particular of a personal nature of the partners, or the pursuit of purposes alien to the corporate purpose envisaged here. The companies financed in the context of specific projects were part of the consolidation scope of the A... group, integrating its investment and economic development strategy. These same data allow for the finding that the punctual activities of loaning money to group companies were not at any time segregated from the other activities of the taxpayer, being clearly situated in the domain of the development of activities contained in the core of its corporate purpose.

8. Equally relevant is the fact that it was, in large measure, exogenous circumstances to A..., such as the aforementioned difficulty in obtaining credit in a timely manner and the urgency in developing the projects, that led it to resort to the financing solution found. For the operationalization of the projects, in terms of speed and lack of credit history (track-record) of the companies, it was sometimes difficult to resort to local financing, being necessary to mobilize financial resources, through non-remunerated advances, for the local companies.

9. The loans granted were causally related, in a direct and immediate way, to A...'s activity, being justified by conjunctural reasons of genuine economic necessity, in that the other available alternatives could, due to their uncertainty, delay and increased cost, irremediably compromise, not only the viability of the investment projects in question – with negative consequences for relations with major clients – but the very viability of the company, which could irremediably see its capacity to obtain income and profits compromised in the short or medium term, having in view its dependence on a restricted set of important clients.

10. In this sense, the interest incurred was useful, appropriate and even indispensable – in light of the criterion of the reasonable administrator and having in view the information then available – to ensure A..., in immediate terms, the maintenance of its source of production, that is, its profit-generating capacity[5]. The viability of A... itself – including the essential nucleus of its corporate purpose – could be affected if the projects in question were rendered unviable due to lack of financing.

11. It is in this context that the fact of granting non-remunerated loans to the group should be understood. The objective was not to reduce A...'s taxable profit, as might prima facie appear, but solely to, given the concrete economic conditions, make feasible the effectuation of projects within the scope of its corporate purpose indispensable to the subsistence of its own profit-generating capacity. This reality shows itself to be entirely reconcilable with the jurisprudence of the STA which on this has held that the "requirement of indispensability of a cost must be interpreted as an indeterminate concept to be filled case-by-case, as a result of an analysis of business economic perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the interest of the company, taking into account the corporate purpose of the commercial entity in question"[6].

12. At the same time, the factual basis of the particular case reasonably allows for the sustaining that the charges incurred with interest are also marked by normality. This, it should be noted, not in the sense that the loans made by A... to the subsidiary companies were habitual and recurring – which clearly was not the case – but in the sense that any other commercial company placed in an identical situation would seriously consider, in light of generally accepted standards of economic rationality, a similar financing modality with equivalent charges. The loans granted to the subsidiary companies, in their exceptionality and punctuality, were part of the legitimate pursuit of the company's profit-making purpose, and the interest supported by the taxpayer was for obtaining and guaranteeing income subject to IRC.

13. From the evidence, it can be reasonably deduced that A... objectively and materially participated in the conduct of the economic activity of the subsidiary companies. There was, therefore, no alteration of the business model or factual modification of the corporate purpose. The lion's share of the time and effort dedicated by A... to business activity was related, not to the provision of financing means to daughter companies, but to the operations of planning and development of the activity of construction of telecommunications and energy networks equipment, so as to achieve, in due time, the defined objectives.

14. The data brought to the case, both in writing and through oral testimony, allow for the conclusion that A... was actively involved in the development of investment projects by its subsidiaries, in no way being possible to say that it aspired only to obtaining passive income. In fact, from the point of view of the economic substance of the transactions at hand, it can legitimately be concluded that it was A... that in fact carried out economic activity on a regular, continuous and substantial basis, even though doing so through the use of subsidiary corporate forms.

15. Similarly, it is important to emphasize that the taxpayer's relationship with the debtor or debtors was subordinated to the fundamental concern of technically and temporally adequate development of the group's investment projects, and not to that of obtaining, from the subsidiary companies, remuneration for the loans granted. At the same time, it is also not plausible to sustain that the primary purpose of the loans granted was to obtain tax advantages. Indeed, in light of the data concretely available, it would be difficult to sustain that the hidden objective of the loans granted to the subsidiary companies, in conditions below market value (i.e., without remuneration), was to reduce profits, to increase deductible interest, to make capital increases or to pay hidden dividends to the parent company.

16. These considerations allow for the conclusion that the non-remunerated advances, far from corresponding to A...'s business model or representing a tax planning strategy, were simply a conjunctural means of responding to financing needs, essentially characterized by necessity, punctuality and exceptionality.

17. An analysis of the concrete circumstances of the present case allows for the conclusion that the loans have sufficient economic justification, from the point of view of the direct connection they establish with A...'s main activity and with the group logic underlying it, characterized by the understandable attempt to provide a prompt, effective and competitive response to the almost irrefusable challenges of major clients and the business opportunities opening up abroad. The same prove to be appropriate, necessary and proportionate to the guarantee of the very subsistence of business activity and its capacity for the realization of the corporate purpose. It is, therefore, a matter of transactions endowed with economic substance and not artificial structures aimed solely at reducing taxable profit, namely through the production and deduction of excessive interest or the hidden distribution of dividends.

III.4.1. Request for Restitution of the Amount Paid and Indemnity Interest

1. The Claimant makes a request for restitution of the amounts collected by the Tax and Customs Authority, as well as payment of indemnity interest. Pursuant to the provision in sub-paragraph b) of article 24 of the LRAT, the arbitral decision on the merits of the claim to which no appeal or objection applies binds the Tax Administration from the expiration of the period provided for appeal or objection, and such administration must, in the exact terms of the finding in favor of the taxpayer and up to the expiration of the period provided for the spontaneous execution of decisions of tax courts, "restore the situation that would have existed had the tax act subject to the arbitral decision not been executed, adopting the acts and operations necessary for that purpose", in accordance with the provision of article 100 of the General Tax Law (LGT) [applicable by virtue of the provision in sub-paragraph a) of paragraph 1 of article 29 of the LRAT] which establishes that "the tax administration is obliged, in case of total or partial finding in favor of the taxpayer on appeal, judicial objection or appeal, to the immediate and full restoration of the legality of the act or situation subject to the dispute, including the payment of indemnity interest, if applicable, from the expiration of the period for execution of the decision".

2. Notwithstanding article 2, paragraph 1, sub-paragraphs a) and b) of the LRAT, using the expression "declaration of illegality" to define the competence of the arbitral courts operating at CAAD, without reference to condemnatory decisions, it has long been understood that the powers that in judicial objection proceedings are attributed to tax courts are included in their competences, and that is the interpretation that is in tune with the meaning of the legislative authorization on which the Government based itself to approve the LRAT, in which it proclaims, as the first guideline, that "the tax arbitral process should constitute an alternative procedural means to the judicial objection process and to the action for the recognition of a right or legitimate interest in tax matters".

3. Although it is essentially a process of annulment of tax acts, the process of objection admits the condemnation of the Tax Administration to the payment of indemnity interest, as can be inferred from article 43, paragraph 1 of the LGT, in which it is established that "indemnity interest is due when it is determined, in gracious reclamation or judicial objection, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than the legally due", and article 61, paragraph 4 of the CPPT (in the wording given by Law no. 55-A/2010 of 31 December, to which corresponds paragraph 2 in the initial wording), which "if the decision recognizing the right to indemnity interest is judicial, the payment period is counted from the start of the period of its spontaneous execution".

4. Thus, paragraph 5 of article 24 of the LRAT, in stating that "payment of interest, regardless of its nature, is due pursuant to the provisions of the general tax law and the Tax Code and Procedure Code", should be understood as permitting the recognition of the right to indemnity interest in the arbitral process. This understanding derives from the principle of effective judicial protection and the corresponding expansion of the powers forming the jurisdiction of administrative and tax courts. Therefore, the Claimant has the right to be reimbursed of the tax paid and indemnity interest by virtue of the said articles 24, paragraph 1, sub-paragraph b) of the LRAT and 100 of the LGT, as this is essential to "restore the situation that would have existed had the tax act subject to the arbitral decision not been executed".

5. In the case, the illegality of the corporate income tax settlement no. 2018..., as well as the respective interest settlement statements no. 2018..., no. 2018..., no. 2018... and no. 2018..., and accounts adjustment no. 2018..., all associated with compensation no. 2018..., resulted from the incorrect application, among others, of article 23, paragraph 1 of the CIRC, there being a lack of factual or legal basis for the correction made to the Claimant's taxable income for the year 2014.

6. The illegality of this settlement is attributable to the TA, as it issued it on its own initiative, with erroneous interpretation of the law. Consequently, the Claimant has the right to indemnity interest, pursuant to articles 43, paragraph 1 of the LGT and 61 of the CPPT, concerning the amount to be reimbursed. Indemnity interest is due from the date on which the Claimant made the payment until full payment of the amount that must be reimbursed, at the legal subsidiary rate, pursuant to articles 43, paragraph 4 and 35, paragraph 10 of the LGT, article 61 of the CPPT, article 559 of the Civil Code and Order no. 291/2003 of 8 April.

IV. DECISION

In light of the above, the following is decided:

1. Annul the corporate income tax settlement statement no. 2018..., as well as the respective interest settlement statements no. 2018..., no. 2018..., no. 2018... and no. 2018..., and accounts adjustment no. 2018..., all associated with compensation no. 2018..., due to the absence of factual or legal basis for the correction made to the Claimant's taxable income for the year 2014, in violation of the provisions of, among others, article 23 of the CIRC;

2. Order the reimbursement of the amounts improperly paid by the Claimant as corporate income tax in the year 2014, in the amount of €57.165,06 plus the reversal of the 2014 settlement, in the amount of €4,268.27 which was improperly retained by the TA, all in the total amount of €61.433,33;

3. Condemn the TA to the payment of indemnity interest that is due pursuant to article 43 of the LGT and article 61 of the CPPT.

V. Value of the Case

The value of the case is fixed at €61.433,33 (sixty-one thousand four hundred and thirty-three euros and thirty-three cents), pursuant to the provisions of article 32 of the Administrative Procedure Code and article 97-A of the CPPT, applicable by virtue of the provision in article 29, paragraph 1, sub-paragraphs a) and b) of the LRAT, and article 3, paragraph 2 of the Regulation of Fees in Tax Arbitration Processes (RCPAT).

VI. Costs

Pursuant to Table I annexed to the RCPAT, the costs are in the amount of €2.448,00 (two thousand four hundred and forty-eight euros), to be paid by the Respondent, in accordance with articles 12, paragraph 2 and 22, paragraph 4 of the LRAT, and article 4, paragraph 5 of the RCPAT.

Notify.

Lisbon, 11 April 2019.

The Arbitrator President

(Fernanda Maçãs)

The Arbitrator Member

(Jónatas Machado)

The Arbitrator Member

(Miguel Patrício)

Text prepared by computer, pursuant to the provision in article 131, paragraph 5 of the CPC, applicable by reference to article 29, paragraph 1, sub-paragraph e) of the LRAT.

The drafting of the present decision is governed by orthography prior to the Orthographic Agreement of 1990.

[1] Smith, Harmelink, Hasselback, CCH Federal Taxation, Basic Principles, Wolters Kluwer, Chicago, 2017, 4-11 § 4385 ff.

[2] See